Centralized vs. Decentralized Procurement: The Ongoing Balancing Act

For better or worse, many companies firmly hang on to decentralized procurement organizations. Yet according to most experts, the reality is corporate procurement can save billions of dollars annually. Why the opposition, and is it possible the two models can work together?

Just as state governments believe they are closer to their “customers” and know more about their needs and wants than the federal government, division or business unit stakeholders don’t believe corporate procurement is capable of running their business and meeting the needs of their customers as well as they can. On the other hand, corporate procurement believes it knows best what the divisions require.

In many companies, divisions believe corporate procurement brings only one skill to the table, the ability to leverage volume. Frankly, if leveraging volume is the only value corporate procurement brings the divisions are right, corporate procurement doesn’t need to exist because divisions can band together and buy in bulk.

How do these departments come together -- because they are part of the same company -- to provide the best value and meet the common corporate objectives of satisfying the needs of the ultimate customer, and providing the best return on investment to the shareholders?

First, focus on those common objectives. Second, make sure the corporate procurement department has the capability to deliver a good, solid business strategy, provide excellent processes and recruit and retain top-notch talent that will enable the division procurement departments to make the very best decisions. The divisions are valued customers of corporate procurement and should be treated as such.

There are two critical factors for a successful corporate procurement department:

Top management must believe corporate procurement is the best way to optimize procurement effectiveness; and

The chief procurement officer (CPO) must be highly skilled and a team player.

In a decentralized corporate culture, it is critical the CPO be given the authority to execute the business strategy, as well as hire, train and fire staff. If he or she is not given certain levels of power, even the most talented CPO will fail and the divisions will become mavericks and bypass central procurement.

In addition, a powerless CPO will leave in a hurry. To be hired to execute great ideas, form a team and bring an organization together to bring value, but not be given the power to execute the strategy is incredibly frustrating.

Lou Gerstner, former CEO of IBM, said it best: “If a CEO thinks he or she is re-directing or reintegrating an enterprise but doesn’t distribute the basic levels of power (in effect, redefining who ‘calls the shots’), the CEO is trying to push a string uphill.”

A number of years ago, the CEO of an overseas electronics company went “out of the box” both corporate- and culture-wise to hire a well-seasoned CPO to manage his company’s extremely decentralized procurement organization. Over a period of three years, the CPO transformed procurement, creating a corporate procurement department while at the same time respecting the independence and creativity of the division procurement departments, and saving billions of dollars. That particular company won a prestigious award for excellence in procurement and was covered extensively in the business media.

On the other hand, a large U.S. oil and gas company replaced its retiring CPO – whose department stood out like a beacon in the industry because of its success and the inclusiveness of its corporate and division procurement departments – with an executive biding his time until retirement. Because of his inexperience in procurement, others in the department soon left and the division procurement departments began to operate on their own, seeing no value from corporate anymore. Today, his replacement is struggling mightily to reorganize and strengthen corporate procurement and, at the same time, to convince the business units of the value corporate can bring them.

The winning combination is a highly skilled procurement leader operating with authority and the support of his senior management. One without the other does not work.

However, trying to run a large, multinational organization with a centralized mindset also won’t work and will result in disorganized operations. Just as state governments are necessary to help run a large, diverse country, so too are division procurement departments the best way to manage diverse and geographically spread operations.

It’s the strong, highly skilled leader who will deliver the best corporate procurement structure: A centralized department that can leverage volume wherever possible, and provide the talent, information and processes to the division procurement departments to enable them to make their own decisions.

Gene Richter, a galvanizing force in the field of procurement, led the procurement operations at Ford, Black & Decker, Hewlett-Packard and IBM in the 1980s and 1990s. At those companies he established “procurement commodity councils” to make purchasing decisions for bulk commodities. He did it for indirect purchases like marketing and communications, telecommunications, logistics and temporary labor as well. In every council he included representatives from the divisions which purchased the commodities or services.

That’s how a good leader works. He doesn’t say “we spend more than a billion dollars on steel, therefore all steel has to be purchased by corporate and everyone has to buy off of our contract.” Instead, he goes for the best of both worlds, overall leverage by consolidating the purchase and getting the influence and buy-in of the divisions.

Richter knew if he wanted people to go along with him, he must ask them to be part of the decision-making process. He didn’t make the decision and then force it on them.

For example, at a large, multi-national petrochemical company the corporate procurement department is so powerful it believes others are lucky to be invited to meet with it. As a result of its arrogant attitude and behavior, the division procurement departments go along purely out of duress, constantly push back and don’t give 100 percent. In the end, it’s the company’s ultimate customers and its shareholders who suffer.

Corporate procurement must consider the divisions their customers, and have the goal of not just satisfying their needs, but delighting them as well. This is especially true if a division is experiencing a downturn. When that happens, corporate should give the division top priority and do whatever it takes to help it and create a turnaround. The division will not only thank corporate procurement, it will be even more willing to work with it in the future.

It’s this culture of service -- where divisions pull the services they need from corporate procurement not have the services pushed on them -- that will prompt a healthy relationship between the departments, to the benefit of the company’s ultimate customers and shareholders.

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Jimmy Anklesaria, F.C.A., LL.B., M.B.A. is the founder of Anklesaria Group, Inc. He is a Fellow Member of the Institute of Chartered Accountants, and holds a law degree and an MBA. Mr. Anklesaria is the author of Supply Chain Cost Management: The AIM & DRIVE® Process for Achieving Extraordinary Results (AMACOM, 2007) and is co-author of Zero Base Pricing™: Achieving World-Class Competitiveness Through Reduced All-In-Cost with David N. Burt and Warren E. Norquist. Mr. Anklesaria holds the international service mark for the AIM & DRIVE® process.